A report by Asset Risk Consultants has put passive pioneer Charles Ellis’ “winner’s game” and “loser’s game” constructs to the test by applying them to private discretionary investment portfolios.
Originally, Ellis likened active management to playing the winner’s game, where managers attempt to outperform the market through stock picking and alpha generation.
Passive investment strategies, conversely, followed the loser’s game, which assumes that the best strategy for winning is to minimise losses.
ARC has argued that the typical discretionary investment management philosophy is really the archetypal loser’s game strategy.
DFMs serve “a community that is particularly sensitive to losses” and their philosophies often centre on absolute returns through the compounding of consistent positive returns and minimising losses.
Using its own ARC GBP Steady Growth Private Client Index (SG PCI) as a benchmark, the financial planner found that from 2003 to the present, the discrepancy between playing an almost perfect loser’s game (the SG PCI excluding the 10 most negative months) and a “disastrous pursuit” of the winner’s game (the SG PCI ex the 10 most positive months) was massive.
“The impact of compounding is evident as the upper boundary pulls away from the ARC GBP Steady Growth index,” said ARC.
“However, it is also clear from the bar chart that the negative periods of performance are more negative than the positive periods of performance are positive,” it continued.
“This outcome is a feature of financial markets – returns are not normally distributed around the mean but exhibit a skew with a higher volume of low positive outcomes, and a smaller number of markedly negative outcomes.”
Furthermore, over the last investment cycle, the financial planner was able to conclude that “being a good loser” translated into above average returns for private clients.
